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The of Egyptian Metal Industries (Metalco) - Case Study Example

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The company is facing the problem with its current costing system because it is employing the traditional method of costing. The problem is that the overhead is computed based…
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The Case of Egyptian Metal Industries (Metalco)
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Download file to see previous pages By employing the traditional costing method, Metalco uses only “direct labor-hours” (Information Resources Management Information, 2013, p.1432) which shows very little relationship with the accumulation of the “factory overhead costs” (Information Resources Management Information, 2013, p.1432). This results in distortion of product price and also decreases the inducements for the managers in their way of managing the product costs. It has been found that both the methods are providing different results because the volume-based method of costing uses only cost of direct labor and the method of activity-based costing (ABC) make use of various cost drivers for each activity. There is difference in the way of computing per unit cost of factory overhead under both the methods. The method of traditional costing takes only “direct labor-hours” (See Appendix 1), while ABC method activity cost driver into consideration to compute the unit overhead cost (See Appendix 2). The result from the traditional method shows that product COM is more profitable as compared to RES (See Appendix 3). Whereas, the result form the ABC method reflects that product RES is more profitable then COM (See Appendix 4). Therefore, it has been observed that traditional method does not provide accurate result, whereas, ABC method gives more specific result.
It has been analyzed that traditional method of costing does not provide accurate result because it does not utilize activity cost drivers for analyzing the per unit overhead cost. The result which has been obtained from both the methods are different form one another. Traditional method shows that product COM is better than RES, while the ABC method provides opposite result. Metalco shifted its preference from traditional method to ABC method because it gives more accurate analysis of the product cost. The ABC method determines each activity related to producing the item as ...Download file to see next pagesRead More
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